From the Intelligent Investors website, a good read.
New Hope had prepared investors for a weak second half year result. We knew output would be impacted by scheduled maintenance at the Bengalla mine and that low thermal coal prices would hit revenue. And so it was.
The dragline at Bengalla - the giant claw that unearths dirt - was out of action for 80 days and contributed to a 23% decline in output to 4.9 million tonnes (mtpa). Both the machinery and the coal plant are now back online and production should return to normal levels.
Management has confirmed that it plans to lift production at Bengalla over time. We think production could ultimately rise from 10mpta to 12-15mtpa and note that New Hope has carried on with exploration work at Bengalla to expand the resource.
- Key Points:
- Decent results in tough conditions
- Coal prices have risen
- New headwinds
More money:
Coal prices for the second half remained weak, with realised prices of about $79 a tonne, 20% below the same period last year.
Prices have dramatically shifted since then, rising from US$50/t during August to over US$90/t at spot prices now.At current prices, both Bengalla and the dwindling New Acland mine will generate healthy free cash flows. Both mines are in the lowest quartile of industry costs and Bengalla is among the lowest cost thermal coal mines in Australia.
In a year where Australian coal miners have collectively lost more than $2bn, New Hope still generated operating profits of $80m.
Low costs helped generate decent cash flows despite miserable prices and New Hope generated a respectable $36m in free cash flow. Net debt of $265m continues to decline and remains easily manageable.
If we sound cheery about the result it's because it was a good one. There remain, however, several problems the miner needs to address.
More problems:
The most prominent is the ongoing battle to expand production at New Acland. Now entering its 13th year, a resolution has again been delayed and the Land Court will rehear arguments.
A decision isn't expected before 2022. We doubt the expansion will ever go ahead and value New Acland at zero.
The second concern is another court action that has been decided on numerous times. A rail consortium that claims New Hope is liable for a $174m debt has already been denied twice but has appealed and the case is again open.
There is no doubt a deliberate strategy to boycott Australian coal exports to China is in play. New Hope, however, generates just 5% of revenue from China so hasn't been deeply impacted.
Thanks to the boycott, Chinese generators are now paying the highest coal prices in the world. Despite its obvious cost, we don't think the Chinese action will be reversed anytime soon.
The last concern is flooding in NSW, which has impacted operations at Bengalla. Higher prices will offset some of the output decline and, with New Acland production still firing, we expect decent results in the second half.
New Hope has signalled as much with the interim dividend restarted at 4.0 cents per share.The miner is operating superbly and, despite a number of headaches, has remained profitable even as most coal miners lose money. It hasn't been easy or especially rewarding to hold coal miners but higher prices might finally change that.
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